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HYP 6 Month UpdateHYP1 was born into the worst six months for dividend investors -- particularly high-yield investors -- in modern market history. More dividends were cut in the first two months of 2009 than in any other quarter since the S&P 500's inception. In short, it's been a terrible six months for this port, though there have been some bright spots. (To review, the High-Yield Portfolio (HYP) strategy invests in a diversified group of 15 blue chip dividend-paying stocks with strong dividend cover, relatively low debt, and a history of increasing dividend payouts. The holding period is theoretically forever -- unless a stock is bought out or cuts its dividend.)Let's start with the terrible…My first application of the HYP strategy has taken some major lumps and most of those could have been avoided with more analysis on my part. My approach to picking the first fifteen stocks was to focus on diversification and yield first and concern myself with valuation second (note the HYP strategy puts no emphasis on valuation since you don't buy the stock to sell it). This forced diversification obviously backfired on me as I added financial-based or -dependent companies like BAC, PLD, and GE to gain exposure to the sector's higher yields. Some of you questioned these picks early on and you were spot on. I also don't think I could have picked two worse consumer-reliant companies in CCL and IP. Both were highly-leveraged and their dividends were unreliable. Some of you have wondered why I cut GE and IP before they formally cut their dividend, but with yields of 14 and 17 percent, respectively, I can say with 99.9% certainty that they will cut in the coming weeks and it will be by enough to essentially eliminate their dividend producing value to the HYP. I didn't sell PFE for this very reason -- the yield is still over 4% -- though I was disappointed by their use of capital to acquire WYE when they could have kept their dividend where it was and bought smaller firms with more growth potential. Why I haven't replaced all those sales…For tracking purposes, I originally assumed a $1,000 investment in 15 stocks, totaling a $15,000 investment. The sales of BAC, PLD, GE, IP, and CCL resulted in a "permanent" loss of about $3,100 and leaving $1,900 left over to reallocate to replacement stocks. So far, I've "bought" three replacements -- INTC, PCL, and IR -- with the leftover $1,900, so about $633 per investment. Rather than spread that $1,900 over five stocks and forcing 15 holdings, I think I can achieve relatively similar diversification benefits with the current 13. Remember that HYP specifies 10 to 15, so we're not straying from the strategy.Some good things…Despite the hardships the portfolio's faced, we're still on track for a 4+% yield this year. The diversification rules of HYP has helped as well, with our utilities ED and SO down just 5% and 13%, respectively, while the S&P plunged 40%. In fact, only one of our remaining originals -- DD -- is trailing the market since inception and the HYP1 remains 66.67% accuracy overall, putting it near the top quarter of CAPS portfolios. Not bad, all things considered. Final thoughts…The HYP strategy itself remains sound, in my opinion, though the dividend environment has changed dramatically since it was created in 2000. It's a much riskier landscape these days and it pays to be more selective. Any yield over 7% is questionable and likely to be slashed, so accepting a lower but better covered yield is the key for income investors going forward. [more]